Good afternoon, everyone. And welcome to TSMC's Fourth Quarter 2020 Earnings Conference Call. This is Jeff Su, TSMC's Director of Investor Relations and your host for today. To prevent the spread of COVID-19, TSMC is hosting our earnings conference call via live audio webcast through the company's website at www.tsmc.com, where you can also download the earnings release materials. If you are joining us through the conference call, your dialing lines are in listen-only mode.

Thank you, Jeff. Happy new year, everyone. Thank you for joining us today. My presentation will start with financial highlights for the fourth quarter and a recap of full year 2020. After that, I will provide the guidance for the first quarter of 2021. Fourth quarter revenue increased 1.4% sequentially in NT terms, or 4.4% in US dollar terms, as we saw strong demand for our 5 nanometer technology driven by 5G smartphone launches and HPC-related applications. Gross margin increased 0.6 percentage point sequentially to 54%, maybe thanks to cost improvement, partially offset by the margin dilution from 5 nanometer ramp and an unfavorable exchange rate. Our utilization rate in the fourth quarter was at an extremely high level, partially due to more production output of which some of the wafers will be shipped in the first quarter. Total operating expenses slightly decreased by NT2.6 billion. Therefore operating margins increased by 1.4 percentage points sequentially to 43.5%. Overall, our fourth quarter EPS was NT5.51 and ROE was 31.4%. Now let's move on to the revenue by technology. 5 nanometer process technology contributed 20% of wafer revenue in the fourth quarter, while 7 nanometer and 16 nanometer contributed 29% and 13% respectively. Advanced Technologies which are defined as 16 nanometer envelope accounted for 62% of wafer revenue. On a full year basis, 5 nanometer revenue contribution came in at 8% of 2020 wafer revenue. 7 nanometer was 33% and 16 nanometer was 17%. Advanced Technologies accounted for 58% of total wafer revenue, up from 50% in 2019. C. C. Wei: Thank you, Wendell. Hi, everyone. This is C.C. Wei. Good afternoon. We hope everybody is staying safe and healthy during this time. Now, let me start with our near-term demand and inventory. We concluded our fourth quarter with revenue of NT361.5 billion or US$12.7 billion, which was in line with our guidance, mainly due to strong demand for our 5-nanometer technology, driven by 5G smartphone launches and HPC-related applications. Concluding 2020, the semiconductor industry, excluding memory recourse, was about 10%, while foundry industry increased about 20% year-over-year. TSMC’s revenue grew 31.4% year-over-year in US dollar term. Moving into first quarter 2021, our business continues to be shrunk, supported by HPC-related demand, recovery in the automotive segment, and a milder smartphone seasonality, again, in recent years. On the inventory front, our fabless customers overall inventory was digested throughout the fourth quarter. We now expect it to approach the historical season exiting 2020 better than our forecast 3 months ago. We observe that the supply chains are changing their approaches to inventory management amidst the lingering macro uncertainties. Looking ahead, we expect the supply chain and our customer to prepare a higher level of inventory compared to the historical season level for a longer period of time, given the industry’s continued need to ensure supply security. Next, let me talk about the automotive supply tightness. The automotive market has been soft since 2018. Entering 2020, COVID-19 further impacted the automotive market. The auto supply chain was affected throughout the year and our customers continued to decrease their demand in the third quarter. We only began to see sudden recovery in the fourth quarter.

Thank you, C.C. This concludes our prepared statements. Before we start the Q&A session, I would like to remind everybody to please limit your questions to two at a time to allow all the participants an opportunity to ask their questions. Should you raise to - wish to raise your question in Chinese, I will translate into English before our management answers your question. Now, let’s begin the Q&A session. Operator, please proceed with the first caller on the line.

Yes, the first one to ask question, Gokul Hariharan from JPMorgan.

Thank you for taking my question. Happy New Year and fantastic results and guidance. So, let me ask a question first on 3 nanometer. Dr. Wei, how should we think about the size of 3 nanometer? What we have seen is, over the last 2 years, 28-nanometer was a very big node, 7 nanometer came out to be roughly 70% bigger, if you think about peak revenue, compared to 28 nanometer when you had new applications coming in. How - given the big CapEx plan that you are also outlining, should we think that 3 nanometer, once it ramps up fully, would be substantially bigger than 7 nanometer in terms of peak revenues? Just wondering, how we should kind of think about the size of this process node. And could you also talk a little bit about the opportunities within HPC? Right now you are already engaged with multiple HPC customers. But could you talk a little bit about CPU, x86 CPU, obviously, which is something on everybody's mind. Could you talk a little bit about how do you think it would be exposed to this market as well as we go into the 3 nanometer era?

Okay. Gokul, sorry, this is Jeff. Let me please summarize your questions - two questions, we'll take them in the - one by one. Gokul's first question is with regards to 3 nanometer and about the size of our 3 nanometer. He notes that in the past we have had very big nodes, such as 28 nanometer and then 7 nanometer. So, Gokul wants to know in terms of the peak revenue contribution, do we expect or should N3 be substantially bigger than N7. That's his first question. Correct?

Yeah. Especially considering the step-up in CapEx as well. Thank you. C.C. Wei: Well, Gokul, let me answer your question by saying that we do expect the 3 nanometer will be widely used in HPC-related applications in addition to the smartphones. So, with this kind of engagement with our customer, we do expect our revenue will be bigger, certainly. There's no doubt about it. So, what is the next question?

And then, Gokul, I think the second part of your question is looking at what are our opportunities in high-performance computing. Gokul notes that we have multiple customers engaged. But in particular, he is asking about the progress or the status of CPU opportunity and what do we see as the drivers of HPC? C.C. Wei: Gokul, we don't specifically name one of our HPC's applications, such as CPU to say that what is the growth rate. But let me tell you that, CPU, networking and AI accelerator will be the main growth area in the HPC applications. Did that answer your question?

Could you be a little bit more specific on x86? I mean, you already had good success in 7 nanometer penetrating the x86 market. Should we say - should we think that the x86 market share continues to move up a lot as we get into 3 nanometer?

Okay. So, Gokul, I guess, your question is really on the x86. And looking at 7 nanometer has done well, as we get into 3 nanometer, will our exposure to x86 continue to increase? C.C. Wei: Again, we don't specifically comment on very specific area. We work with our customer continuously and to supply the very good technology to support their business.

Okay?

Thank you. I'll go back into the queue. Thank you.

All right. Thank you, Gokul. Operator, can we move on to the next person on the line, please?

Next one to ask question, Randy Abrams, Credit Suisse.

Okay. Yes. Thank you. I have - I got two questions to ask. First on the - you talked about the automotive and I assume also your mature nodes are very tight. You traditionally haven't added that much capacity on mature nodes and 8-inch. Could you discuss what's in that because you have some mix of that, how you're seeing a strategy to add capacity for those nodes? And could you also look at - auto has been only about 3% of revenue, should we expect a meaningful pickup in this vertical, both the mature applications and also from new areas like EV and ADAS?

Okay. Randy, let me summarize your question. You're asking first on the automotive side. He notes our comments that automotive supply is tight. Do we expect a pickup in the automotive vertical? And then, also in looking at the mature nodes, will auto benefit our mature nodes? And then ADAS and other trends in automotive, how do we see? C.C. Wei: Well, let me say that, now we see the automotive industry need a lot of semiconductor component, and that's including the leading-edge technology for the ADAS system and also some of the mature technology for a lot of applications like sensor, like power management IC. We do see right now a little bit shortage on the automotive, the mature technology supply and we are working with customer to mitigate to show this impact.

And then Randy is also asking second part on our mature nodes. Given the tightness, will we consider to add capacity for the mature nodes? C.C. Wei: We always work with our customer to pin our technologies, capacity, all those kind of thing. For mature node, we used to convert some of the large capacity into specialties. Right now, the trend stays the same.

Okay. Great. And my second question, it's two parts. Just want to ask on gross margin and inventory. The gross margins you've improved 4 points year-over-year. Part of that utilization, but depreciation also was up 45% NT dollar to get you 6 points. So, could you discuss if you've had a breakthrough on the cost reduction side? And if - now, I think last quarter you said about 50%. But given what you've seen on cost reduction and coming off 54%, if you could have better confidence on margin, could continue to do better? And then I'll just ask a quick on inventory. Was it up 15 days? Historically, you draw down within the fourth quarter, but maybe the trend wise inventory was rising into early in the year.

Okay. Randy, let me summarize your questions, two parts. First is on the gross margin. He notes that our gross margin improved throughout the year. And Randy wants to know if there is a breakthrough on the cost side and therefore, the long-term outlook for our gross margin, is it still 50% or not?

Right. Randy, this is Wendell. You just mentioned that our depreciation increased 45% year-over-year. I think the number should be 15% year-over-year.

Okay. I was looking Q4 to Q4, I think that - just the fourth quarter-over-fourth quarter.

Right, right. Now, in terms of gross margin in the long-term, we believe 50% gross margin is reasonable and achievable. There are 6 factors affecting our profitabilities: the ramp of leading-edge technology, price, cost, mix, utilization and foreign exchange rate. Take foreign exchange rate, for example, in 2020, the average dollar against NT rate was 29.43. It is now trading between 27.90 to 28. That is already a 5% appreciation of NT. So, every 1% of appreciation of NT will affect our gross margin by a 40 basis point. The other thing is the - in the fourth quarter of last year, as we mentioned, the utilization rate was very high, extremely high, and that's - the abnormal level of high utilization rate cannot sustain. Therefore, in this quarter, we believe the utilization rate will come down a little bit, albeit is still at a very high level. Now, every point of utilization rate change will impact the gross margin by 40 basis point. A third example will be the ramp in our leading-edge technologies. We mentioned last time that we expect N5 ramp in 2021 to affect our margins by 2 to 3 percentage point. And we still think that will be the case. So, if you take all of those into considerations, we believe 50% gross margin is reasonable and achievable in the long-term.

And then Randy had also asked about our days of inventory.

Right.

Increasing in fourth quarter.

Right. And that's partially because some - as we have a very high utilization in the fourth quarter, but some of the wafers will be shipped in the first quarter as opposed to shipped in the fourth quarter.

Okay. Thank you. Thank you, Randy. Operator, can we move on to the next caller, please?

Next one we have Sebastian Hou from CLSA.

Thanks gentlemen for taking my questions. Happy New Year. First question is, I want to follow on the gross margin side. So, you've alluded that in the past two quarters the - your gross margin, actual result turn out to be either at the high end or at the surprise to the upside to your original guidance. While revenue is much on the high end of the guidance, while the Taiwan dollars continue to appreciated second half of last year's. So which means that the margin result to be better than what you originally guided for two quarters consecutively. So, my question is, whether or not the 1Q outlook, the margin is too conservative again? And second, that is whether our structural profitability will need to revise up just as our 5 year revenue growth has just been revised up officially? Thank you.

All right. Sebastian, let me summarize your first question. Your observation that in the past two quarters our gross margin has come in at the high end or slightly above the high end of our guidance. Revenue at the high end and the currency appreciation is there. So, Sebastian is - question is, first, is the first quarter gross margin guidance too conservative? And what about the outlook for our longer term structural profitability? Does it need to be revised up?

Okay. Sebastian, if we compare fourth quarter to first quarter, 54% in the fourth quarter and the mid term of our guidance for first quarter is 51.5%. The 2.5 percentage point difference, actually mainly come from the utilization, as well as the unfavorable foreign exchange rates. So, at this moment, we are still sticking to this guidance, although obviously, we will work hard to continue to improve the gross margins. As for the long-term gross margin, as I just reported earlier that we are maintaining the 50% gross margin to be reasonable, achievable based on the elements - the 6 factors that I just talked about. Each of those factors will affect our growth - profitability in long-term.

Okay. Sebastian, do you have a second question?

Yes, I do. Thanks, Jeff. And thanks, Wendell. My second question is on your CapEx outlook. Apparently that - at least that's a significant upside surprise to me and I think also to the consensus estimate. So, the last time I think when the company raised the CapEx from $10 billion to $12 billion level to the - like a $15 billion to $17 billion level, then that resulted in a 30% revenue growth in 2020. And then - so my question is that, I think the CapEx we invest for the future growth, so whether or not this -- another step-up with the CapEx to like - to $25 billion to $30 billion this year's, will represent an acceleration of the growth in 2022 or ‘23? Thank you.

Okay. So Sebastian's question is, looking at our CapEx guidance for this year, $25 billion to $28 billion, it is above his expectations. So he is looking at the last time, we have an increase in acceleration to CapEx from $10 billion to $12 billion to $15 billion to $17 billion resulted in us growing 30% this year - 31% this year. So what is the outlook for our growth in 2022 or the future years?

Okay. Sebastian, it's too early to talk about - specifically about 2022. But as C.C. mentioned, in the next 5 years our target CAGR is between 10% to 15%. So that's already higher than the original target of 5% to 10% CAGR that we used to have before the last conference call. And that's also because of the higher capital investment that we are ready to make to capture the higher growth opportunities underpin that by the multi-year mega trends in the industry. C.C. Wei: Well, let me add something. This is C.C. Wei. This 10% to 15% CAGR is based on a very high number of 2020. So, we still forecast a 10% to 15% CAGR. That will tell you that how much of CapEx we need to invest.

Okay. Thank you. Thank you, Sebastian.

Thank you.

Operator, can we move on to the next caller, please?

Next one we have Bruce Lu from Goldman Sachs.

Hi. Thank you for taking my question. Great result and great guidance. I think the big difference is, this time is that, you raised the long-term revenue CAGRs from 5% to 10% to 10% to 15%. Can you tell us that in terms of this kind of incremental changes, how much the growth is coming from HPC and what are the other drivers for that? And in terms of that smartphone growth, I think the 5G penetration is already like 30 something percent in 2021. Moving forward, how much growth for you is coming from the dollar content growth or the shipment growth, or can you provide more color on the growth?

Okay, Bruce. So your question is really about our long-term growth outlook, with our growth target CAGR of 10% to 15%. Your question basically is by the different platforms such as HPC, what is the growth contribution and in looking at smartphone, how much is dollar content, how much is unit contribution? C.C. Wei: Well, let me answer the question by - actually, the growth rate from the HPC application is higher than the corporate average. And smartphone is very close to the corporate and also automotive is higher than the corporate average, IoT close to that corporate average. Did that answer your question?

Yes. Thank you. Thank you. Okay. My next question is - I want to ask about structural profitability. I understand that all these 6 factors for the profitability but that's based on the assumption that structural profitability remain unchanged. So, do we consider to move up the structural profitability because of the current supply - structural growth for the company or the structural tightness, especially with legacy technology node?

Okay. Bruce, your second question is on the structural profitability. Given the higher growth outlook, and also the tightness in supply at legacy nodes or legacy technologies. Will we consider to move up the structural profitability target?

Yes.

Bruce, as I just mentioned, we are maintaining the financial objective, i.e., the structural profitability goal of 50% gross margin. And of those 6 factors, every one of them can affect the profitability. For example - I'll just use an example in foreign exchange rate, utilization and also the ramp of leading-edge nodes. And, for example, the leading-edge technologies, the complexities increases the CapEx per K. It's more expensive than before. So we are working very hard with the customer to sell our value, the service value, the technology value and also the capacity value and firm up the wafer pricing. At the same time, we also work very closely with our suppliers to continue to improve our cost, so that altogether we can maintain and earn a proper return in the leading nodes compared to those of the previous few nodes. As a result, we are maintaining our structural profitability goal as 50% of gross margin.

Okay.

So, understand. Let me clarify that, whatever you gain in terms of your cost saving you will still return it to your customer and maintain your 50% profitability target?

It's - there are 6 factors, so all - you add all of them together, it's...

Understand.

Yeah.

I understand. Thank you.

Okay. Thank you, Bruce. Operator, can we move on to the next caller on the line, please? Thank you.

Next one to ask question, Charlie Chan, Morgan Stanley. You're on now.

Thanks for taking my question. Happy New Year. So, first question is also about the CapEx. So in the past for you to spend huge CapEx on leading-edge is usually for the smartphone application given that the key user is Apple. So, at this time you almost doubled your CapEx level, does it means that there is a significant upside to the Intel CPU outsourcing? This is the first question. Thanks.

Okay, Charlie. So your question is on our CapEx basically. Charlie notes that in the past our large CapEx on leading-edge historically has been for smartphone platform, this year, of course, our CapEx number is much higher. So, therefore, he is wondering whether it's intended for a particular customer on the CPU side? C.C. Wei: Well, Charlie, let me answer the question. In fact, we don't comment on specific customer or specific area. Our CapEx guidance is based on the current long-term demand profile underpinned by the industry's mega trend.

Okay, Charlie?

Yeah.

Do you have a second question?

Yes, I do. So, just some feedback to C.C. I think we all understand the mega trend of 5G and HPC. So the last question was just to understand whether there is additional kind of growth driver, for example, IDM outsourcing on top of the organic growth. But my next question, I think it should be more related to your strategy because I think your existing customer Intel two days ago, they also commented about, don't rule out the possibility of licensing their foundry process. And actually 20 years ago, back in 2000, I think you also licensed the largest semi process to National Semi. And so, I'm not sure if TSMC, after 20 years, do you still kind of consider this kind of option? Does that mean, the license your foundry process to your IDM customer or even consider some option like a joint venture for this type operation with your IDM customer? Thanks. C.C. Wei: Well, again, we don't comment on the specific topics or specific customer. But let me tell you that we are working with our customer continuously and - to expand the TSMC's business and to support our customers' demand.

Okay, okay. Got you. So, I will get back to the queue. I have some follow-up. Thanks.

Thanks, Charlie. All right. Operator, let's move on to the next person on the line, please.

Next to ask question, Brett Simpson from Arete Research.

Yeah. Thanks very much. Questions maybe first for Wendell. So, on the revenue guide, I guess, you are starting the year with a far better than seasonal Q1. But I just wondered, how do you see the year playing out. Should we expect in the second half a typical seasonality this year? And then, in terms of the CapEx guide for this year, obviously, there is a big step-up. And spending this year is normally a reflection of how you think about future capacity growth beyond 2021. So, can we assume from the big increase in CapEx this year that your implied revenue growth in 2022 would be - will be higher than 2021? Thank you.

Okay. So, Brett has two questions, one on the revenue guidance. We guided for mid teens for the full year - growth for 2021. So he wants to know how does it play out throughout the year? Is there - second half, will we see the typical seasonality first half, second half split? That's his first question.

Yeah. From what we can see, second half is still higher than the first half.

And then the second part is also CapEx and growth. Looking at the increase in our CapEx investment in 2021, noting that we typically spend CapEx in advance of the growth that will follow. Brett wants to know then should we expect a big year or a large growth year in 2000 - 2022, sorry?

Brett, it's - as I said, it's a bit too early to discuss 2022 in details. But C.C. just mentioned, over the next 5 years, we're looking at the higher range of CAGR. And also, the CapEx spend this year means future opportunity in growth, not just for the next year, but also the years after that. So, we are looking at multiple years of growth opportunities.

Okay?

And maybe just one for C.C. Wei on N3. You mentioned N3 would have the best PPA and we're seeing a lot of transistor innovation at Intel and Samsung in the next couple of years, but you're planning to stick with FinFET at 3 nanometer. And I'm just wondering how you see the transistor density at 3 nanometer. I think at N5 you've talked about 175 million transistors per mill square is the potential of N5. How should we think about N3 in that regard, and relative to some of the transistor innovation we're seeing at Intel and Samsung, are you happy with the FinFET roadmap? Thank you.

Okay, Brett. So your second question is regards to our N3 and our decision to continue to use FinFET transistor structure at 3 nanometer. You note that at 5 nanometer we can deliver about 175 million transistors per millimeter square. So you want to know how this falls out at N3, or maybe in terms of our 3 nanometer in comparison to Samsung or others, how does it compare? C.C. Wei: Well, as I said in my statement, that N3 still provide 70% of the logic density gain in addition to all the performance gain, and the power reductions. Whether that's at 5-nanometer you got 175 million transistor per millimeter square, that's a lot depends on what the number in N3. I think that a lot depend on customers design. We continue to say that we offer the FinFET because of the technology maturity, the performance and the cost, are the best combination for TSMC to serve our customer.

Okay. Thank you, Brett.

Thanks.

Operator, can we move on to the next caller, please?

Next one we have Roland Shu from Citigroup.

Hi. Good afternoon. Congrats on a very good result. My first question is also for the CapEx spending. And there are two parts of my question. So, based on your sharply increased CapEx spending, are you considering to sign long-term contracts with customers, especially to those customers who are new to adopt your most leading-edge technology to ensure a proper return of your investment? And second part of the question is, if this let you have spend ahead in CapEx EUV because on your - the lower productivity for EUV when you first ran EUV? So I would like to know how much CapEx downside you expect after you have improved EUV productivity to the optimized level? Thank you.

Okay. Roland, we will take your questions one by one. Both of them relate to CapEx. First one is that, with the higher level of CapEx that we have in 2021, Roland wants to know that would we consider signing long-term contracts with customers, especially with customers that are new to TSMC, to ensure that we are making a proper return? C.C. Wei: Roland, sign a contract to guarantee the loading in the future is not our common practice. We always work with our customer and continuously work with customer to serve their demand. And we also put our CapEx or expanding our capacity according to our current long-term demand forecast, all right? And did that answer your question?

Okay. Yeah. Yeah. I think it did.

Okay, Roland. And then your second question is also related to CapEx. Roland, let me summarize. I think you're saying that in our CapEx guidance, your assumption that the lower productivity of EUV means leading to a higher CapEx level for TSMC. So your question is that, if the productivity - as the productivity of EUV improves, then will - how much reduction in CapEx could we see? Is that your question? Am I summering that correctly?

Yes, exactly. Exactly. Thanks. C.C. Wei: Well, let me answer that. We continue to improve the EUV's productivity because we are working closely with suppliers. And so far we - the improvement is obvious, but it's still not up to our expectation yet. As for the CapEx will be decreased because of improved productivity, this is in our CapEx plan already.

Okay?

Okay. So, means for going forward, I mean, even you have higher EUV productivity, the CapEx spending or CapEx - capital intensity probably will be still high this year, or in the near future?

Okay. So, Roland, his question is that, even with EUV productivity and factoring into our CapEx that our capital intensity could remain high even into next year. C.C. Wei: Well, the CapEx remained high or the CapEx intensity remained high is because of technology complexity. It's actually that N5 is much more complicated than N7, N3 much more complicated than N5. So, most of that CapEx intensity coming from this technology advancement. Of course, EUV is a part of it, but it's not the only one reason.

Okay. Okay. Then my second question…

Thank you. Roland, I think that's two questions already, sorry, because we still have several people in the queue. I would kindly ask you to get back into the queue, so we can allow everyone a chance. Thank you.

Okay. Thank you.

All right. Operator, let's move on to the next caller on the line, please.

Yeah. The next one we have Sunny Lin from UBS.

Hi. Good afternoon. Thank you for taking my questions. My first question is that, I want to follow-up on 3 nanometer. I think - just want to get a bit of color on your current visibility for the customer adoption into second half of next year. How does it compare with the historical ramp of 5 nanometer and 7 nanometer, and also the cost per transistor for 3 nanometer versus 5? Thank you.

Okay, Sunny. So your first question is on 3 nanometer, you want to know the visibility into customer adoption of 3 nanometer into second half 2022 and how does it compare to 5 nanometer or prior nodes, and also the cost per transistor at 3 nanometer, is it still declining? C.C. Wei: Let me answer that. The cost per transistor actually start continue to decrease. But for your question about engagement, we said the customer - we see a lot of customer, especially from the HPC field, they are engaged with their activity with TSMC.

Okay. Sunny, do you have a second question?

Right. So just a very quick follow-up to my first question. Wonder if C.C. would be able to provide any color regarding the ramp for 3 nanometer for second half of next year. Thank you very much. C.C. Wei: It's early adoption from our customer is both in the smartphone and HPC related applications. That's all I can say.

Got it. Thank you. And then my second question is for your 2021 gross margin. So, with CapEx going up significantly, how should we think about your depreciation growth for this year and also the impact on gross margin? Thank you.

Okay. So, Sunny's second question is on the 2021 overall gross margin. With a higher level of CapEx spending, she wants to know what will be the year-on-year increase in depreciation and what's the impact to the overall 2021 gross margin?

Sunny, the depreciation in 2021 is expected to be between mid to high-20s higher than 2020. And the impact of - to gross margins, well, it's too early to talk about the remaining quarters of 2021. But as a general feeling, you look at the capacity utilization that I just mentioned, foreign exchange rate are favorable and also the N5 ramp negative impact on our profitability, those are the factors that may affect our all year 2021 gross margins. But as I said, it's too early to talk about details on the remaining quarters.

Okay?

Got it. Thank you very much. Very helpful.

Sure. Thank you, Sunny. All right. Operator, let's move on to the next caller, please.

Right now we are having Laura Chen from KGI. Go ahead, please.

Hi. Thank you for taking my question and congratulations for the good result and outlook. I also have a question about the CapEx and gross margin trend. I think given your strong position in the most advanced technology nodes and extremely high CapEx in recent years, I believe there must be some strong conviction on the order outlook with your major clients. So, can you share with us your view that for the N3 first year contribution will be similar to N5 that will have probably more than 10% revenue for the first year mass production? Can we expect that to happen? And also on the gross margin side, given there might be some swing factor of your major IDM clients for outsourcing opportunity, how would you manage the deterioration rate, which may impact your gross margin substantially? That's my first question. Thanks.

Okay, Laura, I think that's two questions. But your first question is on the N3, sort of noting our strong position in the advanced nodes, and also the higher CapEx as an indication of the strong conviction of major clients. Laura wants to know what - will the revenue contribution of 3 nanometer in its first year be similar to - or how does it compare to 5 nanometer in the first year?

Okay. Laura, it's really too early to talk about that at this moment. But as C.C. said, we believe N3 when it's out, it's going to be another large and lasting nodes for TSMC.

Okay. Got it. Thanks. And also on the - probably the swing factor of the utilization rate that may impact the gross margin potentially and the -- particularly for advanced node, how should we look at the trend? How will you manage that?

Okay. So, Laura's second question is looking at our gross margin and then also looking at opportunities, for example, in a particular IDM, if there are swings and utilization, how would we manage that and how would that impact the gross margin? Is that correct, Laura?

Yes. Thank you.

We don't - Laura, we don't comment on specific customers or business outlook. The - what we can say is, we continue to work with our customers closely and to ensure that we provide this proper capacity to them and we also maintain a good utilization out of it.

And as Wendell - yeah.

Laura, let me add some colors. I think our business has been driven, in the past few years, by smartphones. Starting from this year on, the HPC also jump on the wagons. And therefore, we looking - forward looking, we see the traditional seasonality can be moderated with multiple big customer in multiple market segments. So that's our confidence. The other confidence is, our CapEx includes 3 nanometer, also 5 nanometer. Our 5 nanometer is also very strong, stronger than we expected 3 months ago. So those two combined to give us the confidence to increase our CapEx.

Okay, Laura?

That's very helpful. Yeah. Thank you very much. That's very helpful.

Great. Thank you, Laura. Operator, can we move on to the next caller, please?

Next one we have Robert Sanders from Deutsche Bank.

Yeah, hi. I've just got one question actually. Just could you please comment more on the wafer shortage situation and how severe it is at present? Which nodes are you seeing the shortage most acute? Is it 65, 90 nanometer, 0.11, 0.13, whatever it is? And how far are you essentially booked out at some of these nodes? And do you think there is upside to wafer pricing of these nodes? Thank you.

Okay. So, Robert, your question is on the tightness or shortage in the wafer. He is asking, is it at particular nodes such as 65 nanometer and 90 nanometer, 0.13, how short it is and how long it will last? C.C. Wei: Robert, most of the shortage actually is in the mature node. It's not in the 3 - not in the 5 or 7 nanometer per se. But in all the mature node, especially in 0.13 micron, 40 nanometer, and 55 nanometer, in those areas.

Okay?

Can I just follow-up with - one follow-up, which is just - you haven't traditionally built capacity there, but they could become part dependencies for the industry if they are continuing to be short. So, would you actually consider building greenfield to help the industry or you think that other foundries will handle that?

So, Robert, your follow-up question is then, given the shortage or tightness on some of these mature nodes, will we consider to expand, build new capacity at these mature nodes to alleviate any potential bottleneck risk? C.C. Wei: Well, actually, we are working with customer closely and moving some of their mature node to more advanced node where we have better capacity to support them. In addition to that, we also try to manage this shortage condition, try to mitigate the impact from this shortage.

Okay?

Thanks a lot.

Thank you. Operator, let's move on to the next caller, please.

Next one we have Rick Hsu from Daiwa Securities.

Yeah. Hi, Happy New Year, guys. This is Rick. My first question is, I guess, you guys mentioned that now your customers are happy living with a higher inventory than the historical pattern because of the macro uncertainties with COVID-19. So, I wonder if your customers would still be happy living with a higher inventory than the normal historical patterns, if the virus - if COVID-19 is contained. This is my first question.

Okay. Thank you, Rick. So your question is, our - the higher level of inventory that we are seeing partly is attributable to COVID-19. What if COVID-19 is no longer - everyone has vaccine and is no longer an issue, will this continue?

That is correct. C.C. Wei: Yeah. First, they say that we really hope that the vaccine will work, but even it is working, it takes time and then also our customers still at this - today, they still have a different approach for the inventory management as we said, because of the secure of the supply is more important than anything else in today's situation. So we don't think it's really to revert back to the historical level of the inventory.

Okay. Thank you. That's helpful. My second question is also regarding your CapEx because the number this year is really high. So, about 80% of your Tai CapEx this year is going to be spent for leading-edge. So, I wonder how much of that portion is actually for preparation of the capacity built for 2022 and be - not for this year. So, can you share your idea with us?

Okay. So, Rick, your question is on our CapEx. 80% - about 80% is for the advanced nodes. He wants to know how much of this spending for the advanced nodes is in preparation for capacity for 2000 - sorry, 2022.

Rick, we invest this year actually for future year primarily. So, it's not only for 2022. It may also be for the years following that. So that's - I think that's something that I would like to share with you.

Okay?

Okay. That's helpful. Thank you. Yeah. Thank you so much.

No problem. Thank you, Rick. Okay. Operator, let's move on to the next caller.

Next one we have Andrew Lu from Sinolink Securities.

Good morning. Good afternoon. Thank you for taking my question. Can you hear me?

Yes. We can hear you.

Okay. My first question is, if your customer has its own design rule nodes with different metal and poly pitch spec from TSMCs one. Can this customer use a in-house manufacturing in TSMC foundry based on the same design or it needs to redesign the chip-based on TSMC 5 nanometer, 3 nanometer design rule?

Okay. Andrew, let me try to summarize your question. Your question is about our customers' design rules. If the customer has their own design rules, but with different metal and different poly pitch from TSMCs, could this customer use TSMC foundry or use the in-house manufacturing, or do they need to use TSMCs design rules basically? C.C. Wei: Andrew, we always work closely with our customer to support their design into TSMC's process technologies. So, we can manufacture inside TSMC.

So customer doesn't need to change its own design? C.C. Wei: Okay. I cannot answer this question because of - it's two parties cooperation. And as I said, we work closely with them to support their design.

Okay?

Understood. My second question is, since our 3 nanometer, 4 nanometer nodes work you're ramping out next year. What about second half this year? Will we have something like 5 nanometer plus or revision in 5 nanometer process node for second half this year? Thank you.

Okay. So, Andrew, second question is looking at second half of this year, noting that next year will have, for example, N3 and N4, then second half of this year, do we have any new node or continuous improvement - enhancement? C.C. Wei: Andrew, we always continue to improve the technologies. Last year, we introduced our 5 nanometer to the market. This year, we continue to improve it and next year we will improve further. So we never stop.

Okay?

So something like a 5 nanometer plus. C.C. Wei: That's what you are naming, yes.

Okay. Thank you.

Okay. Thank you, Andrew. Let's move on to the next caller, please.

Next one we have Mehdi Hosseini from SIG.

Yes. Thanks for taking my question. First question has to do with the revenue mix forecast for Q1 by technology and platform. It would be great if you could provide some color. And I have a follow-up.

Okay. So, Mehdi wants to know for the first quarter, revenue by technology and revenue by platform.

Okay. Mehdi, in the first quarter, HPC, automotive, and IoT will increase sequentially, while smartphone will experience a milder seasonal decline compared to its recent seasonalities.

And we do not provide a breakdown guidance of revenue by technology, Mehdi. Okay? So, do you have a second question?

Yes. Just a quick follow-up on CapEx. Does your $25 billion to $28 billion CapEx guide include investment for infrastructure in US?

So, Mehdi's question is, does our CapEx guidance this year include any investment for the US fab infrastructure?

Yes, it does. The US fab starts construction this year.

Okay?

Can you elaborate how much of the CapEx is for US?

Not at this point, right.

Okay. Thank you, Mehdi.

All right. Thank you.

Thanks. Operator, let's move on to the next caller.

Next one, Krish Sankar from Cowen and Company.

Yeah. Hi, thanks for taking my question. I also had two on CapEx. Number one, pretty nice step up in CapEx this year from last year. Is it fair to assume your investment in EUV is also up this year relative to last year? And then I had a follow-up.

Okay. So Krish's first question is that, with our increase in CapEx guidance - that we guided for in 2021 versus 2020 being an increase, does that also mean an increase in the CapEx we spend on EUV?

No, we do not disclose that details.

Got it. And then as a follow-up, C.C., you mentioned that how capital intensity is going to be high all the way through 3 nanometer, but you also said long-term capital intensity should be in the mid-30s. So I'm just trying to square that by - what do you mean by long-term? Because it looks like if the 3 nanometer is still going to be high in the next few years, capital intensity might be higher than mid-30s. So at what point should we expect it to get to mid-30s?

Okay. So Krish's second question is in terms of capital intensity, with the capital intensity or CapEx per K at 3 nanometer being higher, and then we have the long-term capital intensity returning to mid-30s. He wants to know when will we return to mid-30s capital intensity level? Is that correct, Krish?

Yes. Thank you, Jeff. Yes.

Yeah. We mean long-term meaning 3 to 5 years. I think 2010 to 2014 can be an example. During that period of time, the capital intensity rose from 38% to 50%, maintaining at high-40s for a couple of years and came down afterwards. Something like that should be a reference.

Okay?

Thank you.

All right. Thanks, Krish. Operator, let's move on to the next caller, please.

Next one, Gokul Hariharan, JPMorgan.

Yeah. Hi. Thanks for taking my follow-up question. One question on CapEx and depreciation. Do we - are we having to spend CapEx a little bit ahead of what we used to spend in past in the EUV era? Is that all - is that the function of having to spend maybe 6 to 9 months ahead compared to, let's say, in the immersion era? That's one. And how should we think about depreciation with this jump in CapEx? Wendell, could you give us a little bit of guidance in terms of how we should think about depreciation for this year and going ahead as well given the heightened level of CapEx?

Okay. Gokul, let me summarize. Your first question is in terms of the CapEx. He wants to know that, are we - with CapEx, are we having to spend CapEx earlier now and is this because of EUV that we need to spend more CapEx earlier? C.C. Wei: Well, let me answer the question. The answer is yes, because of there is a long lead time for the EUV tools. The tools are very complicated and the supply chain for the EUV takes long time to prepare for it. And as a result, TSMC also had to plan in advance. That's longer than the normal tools we used to have.

Okay. And then Gokul, second question is looking at with the higher CapEx, the depreciation outlook.

Right. For this year, Gokul, we expect the depreciation to increase by mid-20% to high-20% for 2021 over 2020.

Okay, Gokul?

Okay. And maybe just add - yeah. So even with that, we are comfortable with the 50% structural gross margin?

So, even with the higher growth in depreciation, Gokul is asking, are we still comfortable with the 50% gross margin?

Yeah. 50% gross margin as a long-term target we think it's reasonable and achievable.

Thank you. Thank you.

Okay? Operator, in the interest of time, I think we'll take the last two callers. So, can we proceed with the next caller on the line?

Okay. The next caller is Randy Abrams, Credit Suisse.

Okay. Yeah. Thank you. My first follow-up on US and China, your overseas sites. For the US site, you bought 1,100 acres. Do you have plans to build out a mega fab or potential to build out multi-phase of 20,000 wafers? And then for the China business for Huawei, where it's down to single digits, how is your outlook for the China and also expansion of the China from 20 K?

Okay. So, Randy, your first question is regards to capacity and fab expansion overseas. So, Randy is asking in the US, in Arizona, we target 20 K. Do we - will we continue to build it out into a mega fab-type of site? And he also wants to know in China, and I guess, you're referring to Nanjing, do we have plans to further expand the capacity in Nanjing? Is that your question, correct, Randy?

Yeah. That's the question, just the outlook to rebound China just post-HiSilicon where it's down to mid single digit contribution.

Yeah. This is Mark. Let me take your question. Yeah. We recently acquired a big piece of land in Phoenix, 1,100 acres. Definitely that was the long-term plan to have a mega-scale production sites. But currently our plan is only work on the Phase I production, I'm talking 2024 with 20,000 wafer per month. And we'll - going forward we will see, according to the market condition and the cost economics provided by the government support to mend the cost differences to decide the next steps. On China, yes, we do have plan to continue expand in China. But, of course, the business in China after leading-edge will - does have a reset, but we do expect the demand in China will continue and we will gradually, accordingly, increase our capacity in Nanjing.

Okay. Okay, great. And my second question, if you could give - I think you gave first quarter, but the full-year growth for each of the platforms? And also for the back-end where you're doubling CapEx, what's leading that investment between the InFO, CoWoS, SoIC in growth outlook for back-end?

Okay. So, Randy is asking about 2021 growth, first growth outlook by platform and then growth outlook by the back-end, and then, between the back-end InFO, CoWoS by segment. C.C. Wei: Okay. Randy, for 2021 by platform, we think HPC and automotive growth will be higher than the corporate average growth. Smartphone and IoT will be similar to the corporate average growth in US dollar terms. In terms of our back-end business, we expect it to grow slightly higher than the corporate in 2021. We do not disclose details within the back-end business.

Okay?

Okay. Thank a lot.

All right. Thanks, Randy.

Yeah. Thank you.

Okay. Operator, can we move on to - in the interest of time the last caller then?

Okay. The next one we have Sebastian Hou from CLSA.

Yeah. Thank you. I'm pretty lucky to be the last one and ask again. Thank you. Two follow-up. The first follow-up is, to follow on Mark's comments that - I think Mark said that the Company has noted its 5 nanometer demand also stronger than you thought three months ago. So value if you can give us more details about which applications are you seeing as stronger than expected demand? C.C. Wei: High performance computing.

So for high performance computing is the typical those - consumer electronics or is more typical HPC or blockchain-related? C.C. Wei: Sorry, I didn't hear the - we didn't hear the last part, Sebastian. Your...

Yeah. I'm sorry. I think that the - for the HPC part, is it more related to your existing customers or more related to the blockchain-related products?

Oh, let me just add a little bit color on this. High-performance computing as Wendell just said will be the major growth driver of our business. And this field is currently under exciting changes. The high-performance computing's architectures, as you know, from different customers, everybody is striving to get the best performance with different architectures. So many, many - many more players is getting into this field. So, we see a stronger innovation is coming our way on N3, as well as on N5, yeah.

Okay. Okay. That's great. Thank you.

It's not on cryptocurrency, Sebastian. We don't count on that, but we support that, yeah.

Okay. Yeah. That's fair. And the second follow-up is for - to Wendell's comment on that. I think this year's - based on the guidance that we will see the CapEx intensity to go up to 50%. So, if we calculate - based on the revenue guidance, if we do some calculations, which means the free cash flow for this year could be - the growth will likely to be - will be pretty small or even flat, depends on how things go, but definitely not as strong as past few years. So, my question is that, is the company still sticking to the dividend policy that 70% of free cash flow?

Okay. So, Sebastian, your question is then in looking at the CapEx, looking at our revenue guidance, the capital intensity this year been about - around 50%, then the free cash flow growth may slow this year. So, what is the outlook for the dividend? Do we still use 70% of free cash flow as the cash dividend formula?

Right. Sebastian, our dividend policy has two parts, 70% of free cash flow, but not to be lower than the previous periods. So we remain committed to a sustainable and steadily increasing cash dividend. During the periods of higher investment, the focus will be more on sustainable. And as we harvest the growth, the focus will be on steadily increasing.

Okay. So thanks, Wendell. So, given that you're paying the - investors getting the dividend in this quarter and - which is that earnings you made like 3 quarters earlier, so if we do the calculation simulation, which means that in the next 24 months the investor will probably still getting the NT$2.5 per quarter. Is that a fair calculation assumption?

It's at least, at least.

Okay?

Okay.

All right. Thanks, Sebastian.

Yeah, okay. Thank you.

Okay. Thank you, everyone. This concludes our Q&A session. Before we conclude today's conference, please be advised that the replay of the conference will be accessible within 4 hours from now. The transcript will become available 24 hours from now, both of which will be available through TSMC's website at www.tsmc.com. So, thank you for joining us today. We hope everyone continues to stay healthy and safe and we hope you join us again next quarter. Good-bye, and have a great day.